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Salmon: Argentina's Desperate Exchange Proposal

Written by: Felix Salmon03/30/13 - 11:08 AM EDT

NEW YORK (
Reuters Blogs ) -- Argentina has done as the Second Circuit Court of Appeals
ordered, and has now formally
put forward its proposal for paying off Elliott Associates and the other bondholders suing it in New York court.

You could be excused for not entirely understanding what Argentina is proposing, in this 22-page filing: It's not particularly easy to understand. But the upshot is simple, and pretty much as everybody expected: Argentina is offering to give Elliott pretty much exactly the same deal as it gave all the other holders of its defaulted bonds. In practice, that means that Elliott would swap into new Discount bonds with a present market value of roughly $120 million; if settling the case in that way helped Argentina's bonds to rally back to where they were trading in October, then the market value would rise to about $176 million.

Argentina is at pains to point out that “this proposal is a voluntary option”: They’re not proposing that the court force Elliott to accept the deal. But at the same time, Argentina knows full well that the chances of Elliott voluntarily accepting this deal are exactly zero. Elliott is suing for a total of $720 million, and while it might be willing to settle at a modest discount to that sum, there’s no way it’s going to accept the same kind of 70% haircut that it has consistently rejected all along.

Indeed, it's entirely improbable that any of the current plaintiffs, having rejected two previous exchange offers and having spent many millions of dollars in legal fees, would be remotely inclined to accept this offer were it put to them. Which makes it really hard for the court to accept this proposal as a good-faith attempt to pay the plaintiffs what they're owed.

The court specifically asked Argentina how it was going to make current the obligations of the original bonds; and/or how it might repay those original obligations going forwards. Argentina, in response, has proposed doing neither. Instead, it is proposing to give the plaintiffs the 70% haircut, on those original bonds, which they have consistently rejected.

The AP'sMichael Warren says that Argentina’s proposal is “creative,” but I don’t see much evidence of creativity here: Instead, I see a lot of the failed rhetoric that helped bring Argentina to this fraught position in the first place. “Plaintiffs cannot use the pari passu clause,” writes Argentina’s lawyer, Jonathan Blackman, “to compel payment on terms better than those received by the vast majority of creditors who experienced precisely the same default as plaintiffs.” But of course they can do that, or at least they’re trying to, and so far, New York’s courts have ruled quite consistently that they have every right to do so.